1. The Eurozone crisis is part of the global turmoil that began in 2007 as a US real estate crisis, became a global banking crisis, turned into a global recession, and thus gave rise to a sovereign debt crisis. At the end of 2011 there is a risk of returning to a banking crisis in Europe and elsewhere. At the heart of bank weakness lies private and public debt accumulated during the period of intense financialisation in the 2000s.
2. The euro is a form of international reserve currency created by a group of European states to secure advantages for European banks and large enterprises in the context of financialisation. The euro has attempted to compete against the dollar but without a correspondingly powerful state to back it up. Its fundamental weakness is that it relies on an alliance of disparate states representing economies of diverging competitiveness.
3. The euro has acted as mediator in Europe of the global crisis that began in 2007. The European Monetary Union (EMU) has created a split between core and periphery, and relations between the two are hierarchical and discriminatory. The periphery has lost competitiveness in the 2000s, therefore developing current account deficits with the core and accumulating large debts to the financial institutions of the core. The result has been that Germany has emerged as the economic master of the Eurozone.
4. Eurozone policy to confront the crisis has been profoundly neoliberal: cutting public expenditure, raising indirect taxes, reducing wages, further liberalising markets and privatising public property. Corresponding institutional changes within the EMU – above all for the European Central Bank (ECB) and the European Financial Stabilisation Facility (EFSF) – have entrenched the dominance of the core, particularly of Germany. More broadly, policies are threatening to shift the balance of economic, social and political power in favour of capital and against labour across Europe.
5. Austerity is contradictory because it leads to recession thus worsening the burden of debt and further imperilling banks and the monetary union itself. This contradiction is compounded by the nature of the EMU as an alliance of disparate states with diverging competitiveness. As a result, the EMU currently faces a sharp dilemma: either to create state mechanisms that could enforce policies raising the competitiveness of the periphery, or to undergo a rupture.

6. The credit of the ECB has been arbitrarily deployed to protect the interests of large banks, bondholders and enterprises, even by-passing the ECB’s own statutes. Social power has been undemocratically appropriated by an elitist institution subsequently to be placed at the service of large capital in Europe. But the capacity of the ECB to relieve the pressures of crisis is limited because it is has been asked to play a fiscal role for which it was not designed. Moreover, the EMU is hampered by the absence of a state to back up its liabilities and solvency.
7. The EFSF is similarly hampered by the absence of a state authority that could reliably support an expansion of its lending powers. More than that, the ability of the EFSF to recapitalise banks is limited by the national character of banks in Europe. Banks remain closely attached to their nation states. An alliance of disparate states cannot easily raise funds jointly to rescue the national banks of one of its members. It is hardly credible that Germany could, for instance, rescue French or Spanish banks without a commensurate return.
8. The association of nation states with their domestic banks has become more pronounced in the course of the crisis. Banks have been acquiring the public debt of their own states; they have also been depositing spare liquidity with their own National Central Banks (NCBs); they have, finally, relied increasingly on Emergency Liquidity Assistance (ELA) provided by their own NCB. The result is that banks and nation states now face a heightened danger of joint default. The emerging choice for peripheral states is particularly stark: either fully nationalise banks, or lose control over them.
9. The persistence of the split between core and periphery, the absence of effective institutional change for the EMU, the pressures of austerity and the threat to banks
are creating harsh conditions for peripheral countries. Future prospects are bleak, including low growth, high unemployment and worsening burden of debt. The ability of peripheral countries to remain within the EMU is in doubt, and the most likely candidate for exit is Greece.
10. Greece is manifestly unable either to service its public debt, or to comply with the conditionality of the rescue plans, making default inevitable. However, default led
by the creditors and occurring within the confines of the EMU (so-called orderly default) would not be in the best interests of the country. It would probably lead to loss of control over domestic banks; it would not lift austerity; it would keep the country within the competitive vice of the euro. The social costs would be great. The country would also lose some of its sovereignty as fiscal policy would come under the explicit control of the core. The prospect of eventual exit from the EMU would remain.

11. Default ought to be debtor-led, sovereign and democratic, leading to deep cancellation
of debt. Debtor-led default would probably precipitate exit from the EMU. Quitting the euro would offer additional options for dealing with public debt since the state could re-denominate its entire debt in the new currency. Exit would further allow the state more scope to rescue banks through nationalisation and provision of domestic liquidity once command over monetary policy would have been restored. Nonetheless, exit would also create fresh problems for banks as some assets and liabilities would remain denominated in euro. The outcome would probably be the shrinking of Greek banks over time. Exit, finally, would disrupt monetary circulation and cause problems of foreign exchange as the new currency would depreciate. Still, the disruption of circulation is unlikely to be decisive, w hile depreciation would present the opportunity of rapidly retrieving competitiveness. On
balance, if Greece is to default, it should also exit the EMU.

12. Debtor-led default and exit are fraught with risk, and have costs attached to them. But the alternative is economic and social decline within the EMU that could still end up in chaotic and even costlier exit. In contrast, if default and exit were planned and executed by a decisive government, they could put the country on the path to recovery. For that it would be necessary to adopt a broad economic and social programme including capital controls, redistribution, industrial policy, and thorough restructuring of the state. The aim would be to change the balance of power in favour of labour, simultaneously putting the country on the path of sustainable growth and high employment. Not least, national independence would also be protected.
13. More broadly, the Eurozone crisis brings to a close a period of confident economic and political integration in Europe. The ideology of Europeanism which promised solidarity and unity to European people, is in retreat as the core has demonised the periphery in the course of the crisis. The depth and severity of the crisis are eliciting intense social reaction against large banks and enterprises in the EU. The impasse reached by the EMU raises the possibility of more active economic and social intervention by the nation states of Europe in the foreseeable future.
14. The required restructuring of Europe as the EU and the EMU face decline could not be undertaken by neoliberal agents aiming to defend the interests of big business. The restructuring should be democratic in content, relying on the forces of organised labour and civil society; it should draw on the theoretical tradition of political economy and heterodox economics; it should also tread a careful path between declining Europeanism and nascent nationalism. Above all, it should keep firmly in mind the old socialist dictum that European unity is possible only on the basis of workers’ interests. - Download full report